A trend of slower consumer spending
Running Point and its chief investment officer, Michael Ashley Schulman, CFA, were quoted by Reuters in an article — by Granth Vanaik and Katherine Masters, “Levi Strauss to cut prices as weak consumer spending hits outlook” — regarding Levi Strauss & Co.’s 👖 just reported second quarter earnings as well as their outlook and retail consumer strategy.
Levi’s, an iconic brand that is slowly diversifying
Levi Strauss & Co is an iconic brand focused on attractive categories with global scale, reasonable debt metrics, and a focus on sustainable fibers; but it is still mostly a denim company—with 2/3s of sales attributable to menswear—that is slowly diversifying its lifestyle and fashion offerings with Dockers representing approximately 5% of revenues and BeyondYoga less than 1%.
The company distributes through over 50,000 retail stores in more than 110 countries.
Earnings outlook disappoints even as revenue grows
Even as Levi Strauss bested second quarter earnings estimates today by a penny, it cut its earnings guidance for the full year by 20 cents per share, from $1.30 to $1.40 down to $1.10 to $1.20 because of weakness in its US wholesale business and cautious consumers. The company outperformed revenue expectations in Europe and Asia, but underperformed in the U.S.
Revenue is still expected to grow, but at a slower pace of 1.5% to 2.5%, according to the company, compared with a previous range of 1.5% to 3%. Profits will be positive for the remaining two quarters, but the company’s cut in earnings guidance by 20 cents per share, from $1.30 to $1.40 down to $1.10 to $1.20, indicative of a trend we may see across discretionary retail.
Much of Levi’s growth has come from direct-to-consumer (DTC) brick-and-mortar stores with approximately 1,200 in operation that is also feeding into DTC ecommerce growth. In the three months leading up to May 28, direct-to-consumer revenue experienced a 13% increase, whereas revenue from wholesalers declined 22%, indicating that big-box retailers are facing more challenges compared to Levi’s website and physical stores. Better ERP and inventory management, favorable channel mix, lower air-freight expenses, and advantageous currency exchange improved gross margins in the quarter, and expectations for lower cotton and oil costs may help margins in the second half, but CFO Harmit Singh mentioned that planned price cuts will soften overall margins later this year.
Levi’s narrative is not resonating with investors
Levi Strauss is literally threading through a leery and highly competitive consumer and investor market; the stock is valued less than its 2019 lows even though revenues and earnings are higher. Even as the Levi’s® brand celebrates the 150th anniversary of the 501® jean, it seems that management’s narrative of an expanding casualization trend in workwear and potential European and Asian growth is not resonating with investors. The market is concerned about markdown and promotion assumptions to move inventory as well as retail headwinds from the end of the U.S. student loan moratorium on interest payments as consumers redirect cash to cover college debt. Also to be seen is how the digital savvy and well accomplished current President and incoming CEO, Michelle Gass, will reinvigorate the company after current CEO Chip Bergh transitions out by mid-2024.
Could Levi’s be a target?
Because of its decent balance sheet and phenomenally strong brand, Levi’s may be ripe for a takeover offer from private equity or a major European fashion conglomerate that wants to extend their brand amongst hipsters, in line with how Pharrell is driving menswear at Louis Vuitton and Balmain is collaborating with Beyoncé (now that she has ended her partnership with Adidas).
Note: In full disclosure, I own several Levi’s 502 tapered-leg jeans.
Article excerpt is below:
Decline in U.S. wholesale revenues is likely the beginning of a trend for the rest of 2023 that will induce Levi’s to increase promotions and cut prices, crimping gross margins and slowing revenue growth as a result, said Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors.
“The only casual item I own is a Levi’s jacket.” ~~John Cooper Clarke, punk poet of the 70’s and 80’s
“My memories are of denim. I remember being 12 In my Levi’s. Wow!” ~~Stefano Gabbana of Dolce & Gabbana
“Denim comes and goes into style often, but my Levi’s have longevity. They will never be just a fad.” ~~Melina Matsoukas, Grammy Award winning Greek / American music video, film, commercial and television director
Disclosure: The opinions expressed are those of Running Point Capital Advisors, LLC (Running Point) and are subject to change without notice. The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Past performance is not indicative of future results. Forward-looking statements cannot be guaranteed. Running Point is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Running Point’s investment advisory services and fees can be found in its Form ADV Part 2, which is available upon request. RP-23-65